For Stockton, Calif., Bankruptcy 'Freezes Everything'

Many cities around the country are faced with growing costs and shrinking revenue. Despite making sweeping cuts, Stockton, California recently became the largest city to file for bankruptcy. Host Michel Martin talks with Stockton Mayor Ann Johnston about how she's managing a city that's operating in the red.

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MICHEL MARTIN, HOST:

I'm Michel Martin, and this is TELL ME MORE, from NPR News. Later today, in Faith Matters, we'll hear about a new study that tells us much new information about the religious faith practices among Asian-Americans. That's just ahead.

But first to a problem for many cities and towns around the country: how to deal with growing costs and shrinking revenue. In Detroit, Mayor Dave Bing is pressing for salary cuts across the board for public employees. Scranton, Pennsylvania's mayor moved all city employees, including himself, to minimum wage to deal with a budget shortfall.

And recently the city of Stockton, California took the dramatic step of filing for bankruptcy. It's the largest city in the country so far to do that. Stockton currently faces at least $500 million in debt. Nationwide, fiscal experts and officials in other troubled cities are watching Stockton to see if bankruptcy is the first step in recovery, or just another example of decline.

With us now is Stockton's mayor, Ann Johnston. She's been in office for four years and previously served as a city council member. Mayor Johnston, thank you so much for speaking with us. Thanks so much for taking the time.

MAYOR ANN JOHNSTON: You're welcome, Michel.

MARTIN: Stockton has a $26 million deficit for the current fiscal year, and as we mentioned, half a billion dollars in debt. Now, I'm sure this is a complicated story, but as succinctly as you can, can you tell us how it got to this point?

JOHNSTON: Well, it took a number of years to get to this point. In the '90s, very generous salary and pension benefits were given our employees. They were negotiated as part of union contracts. There was money to do that at that time, and most cities in California were giving very generous salaries and benefits to particularly public safety employees, police and fire.

And then in the early 2000s, we had a great housing boom here in Stockton. We were just building homes, subdivisions, you know, year after year, major revenues coming in through property taxes and developer fees and all of that. And the city fathers at that time thought the money would continue to roll in and started spending quite lavishly on infrastructure projects, like a sports arena, a ballpark, a number of very public buildings that we sold bonds in order to finance.

But really hit us hard was the collapse of the housing market, because in 2007 the bottom fell out, and it just wiped out our property tax revenues and our developer fees. It was a compounding of all these things.

MARTIN: So you can imagine some of the reactions to this circumstance have been very emotional and intense. For example, the health insurance benefits for retired city employees were cut. I'm talking here about steps that the city's already taken to try to get ahead of this crisis.

So - and you've already cut about $90 million in spending, including eliminating 25 percent of the police force. How is the city reacting to these cuts, to this point? Many people are saying that the quality of life in the city has already deteriorated. Do you think that that's true?

JOHNSTON: Well, it is, to a certain extent, because over the last three-and-a-half years, we've had to make these drastic cuts just to balance our budget. And so we've made over $90 million in cuts to our general fund budget already. So this year, we were faced with this $26 million gap. There was no more cutting we could do in order to protect the health and the safety of our community. So we said stop, no more cuts. We have to figure out how to move forward and get ourselves financially sound again.

MARTIN: What happens with the bankruptcy? Having declared bankruptcy, what happens next?

JOHNSTON: Well, it freezes everything in terms of our creditors can't come after us and take the properties while we're in bankruptcy court - much like private bankruptcy, where it sort of stays all the activity until the creditors get together and start talking about a settlement and how we can restructure our debt so that we can afford it, how we talk to our employee unions to get a few more concessions from them to move forward.

So it's really about coming together and figuring out a solution under the protection of bankruptcy. And that gives us time. It gives us time to figure out how we move forward and really get a solid footing. We really think it's the first step toward our recovery, because we have to get this financial situation under control.

MARTIN: How are all your constituents reacting to this? I know this is very new news, but do they agree with you, by and large, from you're hearing? Disagree? Are they embarrassed about this? How are they reacting?

JOHNSTON: Well, we're all unhappy that we had to come to this point, but the city council and I have been dealing with this for at least six months in terms of educating the public about our financial situation, what choices we have, where we don't want to go. We started out by saying we're going to try and mediate this. We went into a 90-day mediation period with our creditors that is state-mandated now in California.

We spent 90 days talking to the same people we're talking to in bankruptcy court, with the hope that we would have a negotiated settlement that would avoid filing Chapter 9. Unfortunately, we didn't get the deals that we needed in that mediation period. And so in order to balance our budget - which we're required to do by state constitution and our city charter - on July 1st, we had to file Chapter 9.

And all along, we told our citizens: These are our choices. It's more cuts in public safety, it's a mediated settlement, or it's Chapter 9. So we went each particular step until it was inevitable that, in order to get a handle on our finances, that we file Chapter 9.

MARTIN: Can I just take one piece of this, though? I mean, you mentioned that there are some analogies to the city's finances. There are some analogies to homeowners who took out, you know, certain complicated mortgage instruments, and then - balloon mortgages, for example. And then when they had to roll over those payments, they couldn't do it. You know, you were on the city council four years ago, before you became mayor, and presumably you approved some of these benefit plans, these generous benefit plans. Apparently, it appears that some of these benefit plans, there was never a fund set up to pay for them.

JOHNSTON: Right. I know.

MARTIN: How is that possible? I mean, that the city leaders could continue to engage in this level of spending and agree to these levels of benefits for employees without a method to pay for it? How is that possible? How do you explain that to constituents?

JOHNSTON: Most of the benefits occurred during the '90s, and then were enhanced in the 2000s. I was on the city council in the late '90s. I was not on the council when some of the major bonds were sold at that time. And I remember coming as a citizen to the council and asking the council at that time: How are you going to pay for this? Where's the money going to come from?

And staff assured the council, the elected officials, that there was income coming in to take care of that. And so there wasn't a fund set up to continue to provide for the future. It was a pay-as-you-go system. You had enough money to pay each year's expenses, and you went forward.

What has happened, of course, is that we have so many more people living so much longer, that we have far more retirees than anyone ever figured. So there's many elements to, you know, the situation in which we're in. And it wasn't just any one thing. It was a multitude of things. Like the perfect storm that kind of came and, you know, smashed Stockton this particular time.

MARTIN: Well, you know, to that end, though, I mean, one of the reasons that a lot of people are taking a look at Stockton is that in the past, municipal bankruptcies have generally resulted from one particular event - like a particularly risky investment, for example.

JOHNSTON: Right.

MARTIN: You know, or some particular idiosyncratic thing.

JOHNSTON: Right.

MARTIN: Or one particular bad decision. In this case, as you've mentioned, it's a variety of things. And by that standard, a lot of people are saying this is not just Stockton's - an issue for Stockton, but a lot of other cities and towns are going to be going through this. Is there anything that, you know, we should all learn from this?

JOHNSTON: Well, obviously, you're right. Many cities are in the same position that we are. And I think that's why people are paying attention to the Stockton experience. We've had two more cities here in California declare bankruptcy since we did. One of them, San Bernardino, is similar to the issues that we have. So many cities, particularly here in California, gave great benefits that were unsustainable.

They had spending that is out of control. They had a variety of issues, and the economy hit them hard. So cities who are smart in terms of making sure they had that rainy day account there ready to go, who were wise about making sure that their income matched their expenses, looked forward to the future and were more conservative in their outlook in terms of spending were in a far better position than the cities that thought that the money would continue to roll in and this housing boom would never stop.

MARTIN: What is going to be the consequence of this, though, once you get through this? As we mentioned, you still have some - even though there was a spending boom, you still have some aging infrastructure that needs to be dealt with. When you go back out into the capital markets, are you going to be able to fix these things?

JOHNSTON: Well, we believe so. The part of our budget that is in crisis is our general fund, which is about 30 percent of our budget. And that's the part that funds police and fire and public services. The other two-thirds of the budget, from 400 million, is restricted monies. Then part of that pays for our water and our sewer plant. Those come from fees that are dedicated to those particular projects. We can't touch those to pay for police and fire. So it's this general fund that counts its sources of revenue from property tax and sales tax. That's where we're having the problem.

So we believe we'll have some trouble selling bonds. It depends upon what we're doing and the sources of funding to pay those bonds. But we're not going to make the same mistakes again. I mean, it's going to be a whole different environment as we look toward the future in Stockton.

MARTIN: Before we let you go - I know it's not about you. I mean, presumably you didn't run for mayor to preside over the city's decline.

JOHNSTON: No.

MARTIN: I'm sure this isn't what you had in mind when you ran for mayor. And then, there was this New York Times story out this week that talks about, you know, some of the quality-of-life issues we talked about. And one resident was quoted as saying she was almost ashamed to tell people where she lived. How do you deal with that? And how do you deal with your own morale? How do you keep the city uplifted and yourself?

JOHNSTON: I'm an optimist at heart. I believe that things may be bad today, but they're going to get better tomorrow - and if not tomorrow, the next day. And we're kind of used to getting beat up a lot, you know, with the press. And so we find that we who live here know that this is a great place to live, that it's nowhere near what some folks like to make it out to be.

But the bankruptcy is a key to getting through a difficult situation and starting once more to have that solid financial base that we absolutely need to build on.

MARTIN: Ann Johnston is the mayor of Stockton, California. Stockton recently became the nation's largest city so far to file for bankruptcy protection, and she was nice enough to talk with us from her home office in Stockton. Mayor Johnston, thank you so much for speaking with us.

JOHNSTON: You're welcome, Michel.

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